Tuesday, March 25, 2008

Budget Your Finances Now, to Minimize Damage Later

s the process of healing and rebuilding continues ever so slowly in areas ravaged by Hurricane Katrina and Hurricane Rita, many of us are taking a closer look at our own lives. While most of us don't live in hurricane-prone areas, we are all reminded of the possibility of disaster knocking at our door. Mother Nature may provide the most striking examples with hurricanes, earthquakes and tsunamis, but a house fire, car accident, serious illness, or a lost job could prove just as devastating.

We all hope it never does, but if disaster should strike, finances are the last thing you'll want to worry about. You can make it easier on yourself, and your loved ones, if your finances are in order. Disaster-proof your finances with a budget. Here are a few suggestions to help in the same

Create a monthly spending plan.
The US Bureau of Economic Analysis estimates that personal savings as a percentage of disposable personal income was negative 0.7 percent in August. That means the average person spent more money than he or she made in August. If you're on par for average here, you probably won't need to wait for Mother Nature to create a disaster, you're creating your own.

Create a budget, and stick to it. Since budgets are in that same category as diets – most of us begin one every January and are done by February – you need to find one that works for you in order to stick with it. For most of us, that means finding a software program that is automatic and able to easily track transactions from multiple checking accounts, debit cards and credit cards. But even if you use cash and the paper envelope method of budgeting, create a spending plan, and stick to it. Make sure you set aside some money for personal spending for those impulse buys. This will give you some freedom without negatively affecting your overall plan.

Back up your financial records, or use a web-based system.
If you are not taking advantage of the Internet to track and control your finances, you may be taking an unnecessary gamble. PC-based systems, as well as paper, can be destroyed in a disaster. In his September 8th column for the Baltimore Sun, titled "Flood might destroy your PC, but not off-site backup files," Mike Himowitz described how even a broken water pipe or a small house fire could destroy your computer, and the records held on it.

"More importantly, with online banking, you can access your account and pay bills from any PC that has an Internet connection," stated Himowitz. "One of the main concerns voiced by those who fled their homes to escape Hurricane Katrina is that they have no access to their money and no physical way to pay their bills. With online transactions, your physical location - and the location of the PC you're using - no longer matter."

Himowitz suggests that using a storage company to provide online backup, although pricey, can be a wise investment. However, for far less money, you can also use a secure online spending management program, like Mvelopes Personal (www.mvelopes.com). It will help track and control your finances, and pay your bills from any computer with an Internet connection – and you don't have to worry about expensive backup storage.

Set aside the equivalent of three to six months' living expenses in an emergency fund.
An easily accessible emergency fund is one of the single most important things you can do for your financial wellbeing. In the event that disaster strikes, if you don't have enough set aside to cover basic living expenses, including mortgage, food, and car payments, things could quickly go from bad to worse.

If setting aside this much money seems unattainable, start small. Cut out those daily trips to the vending machine. You'll be amazed how quickly the money adds up. Use cash gifts, tax refunds and annual bonuses to build your fund. When you set up your monthly spending plan, include a contribution to your emergency fund, and make it automatic.

Your emergency fund needs to be easily accessible. That means in a savings or money market account, not real estate investments or stocks. Select an account with no service fees, which can be as high as $100 a year. Also, make sure you are getting a good interest rate – many online banks, like NetBank, EverBank or EmigrantDirect, currently have savings accounts paying three to four percent – that uses an average daily balance instead of minimum daily balance.

This account should only be used for real emergencies, not holiday spending sprees or other indulgences. If you do draw from the account, make repaying it a top priority.